Darren L Perks asked:
A credit rating is a strange thing? It has the ability to help or hinder our lives in so many ways.
With a good credit rating it can open the flood gates to borrowing. With a bad credit rating your choices are very limited. The question is “How can an electronic record hold so much power? The answer is it’s all about risk.
Your credit score is used by any business that wishes to provide you with a service or credit. From the utility supplier looking to see if you can pay on time to a multi national bank offering you a mortgage. Your rating is the way a business assesses your risk, and your risk sets the price.
Any business offering you a service or credit is in business to make money. The business has to way up how much money they will make against the risk of you defaulting. This is why your credit score is so important. It helps them decide who is good, who is charged more and who is untouchable.
When you are in debt the debt can have a dramatic effect on your rating. The curious thing is as long as you can meet all the payments. Even if these are just minimum payments then your rating will be good. This will allow you to borrow more! A note of caution if you can’t repay your existing debt then borrowing more money is not a smart move. Seeking help is.
If you are struggling to repay your normal household bills and your debt, your rating is at a turning point. As soon as you start missing any regular payments your rating will fall. The more you miss the more it falls. By this stage it becomes so poor that the only way to improve it is by dealing with the debt.
For most people there a 3 main ways of resolving a debt problem (England & Wales only). These are Debt Management, Individual Voluntary Arrangement and Bankruptcy. Each of these solutions has different consequences so please take advice before entering any solution.
Let’s look at how each of the solutions affects your rating.
Debt Management is an informal arrangement between the Debt Management Company and the creditors. You a pay an agreed amount per month and the money is split between the creditors. As each creditor receives less than there normal monthly repayment. Your rating will continue to be affected until all of the debts have been paid in full.
Once the debts have been paid in full, your debts are classed as satisfied it will start to improve. Example: let assume debts of £25,000 with a repayment of £200 per month. Note the any debt management company charges an administration fee; let’s say £40 per month.
Without interest and charges it will take 13 years to repay the debt. However it is unlikely that the interest will be frozen and the repayment period can be much longer. In this instance your credit rating will start to improve after 13 years.
IVA (Individual Voluntary Arrangement) is a legally binding contract between yourselves and your creditors. An agreed monthly payment is paid into the IVA each month. Once the IVA is complete (usually 5 to 7 years) any surplus debt is written off.
A common misunderstanding is that your rating is treated differently in an IVA to someone in a bankruptcy. It is not. If you cannot repay all of your debts in full you are insolvent. While you are in an IVA your rating is classed as bankrupt- “Bankruptcy Status”. Your credit rating will only start improving once the IVA is complete (after 5 to 7 years). For many years after the completion of the IVA lenders will know that your previous debts were not paid in full. This will affect your ability to access credit
Bankruptcy is where you recognise that you cannot afford to repay the debts, and an application is made in the county court to be declared bankrupt. A bankruptcy lasts for 1 year but you may have to repay an agreed payment for 3 years. Once the year is over all your debts are written off.
Once you are declared bankrupt you will have a mark against your credit rating for 6 years. During this time all lenders will know that the debts were not repaid in full. However once the bankruptcy (1 year) is over your credit rating can start improving.
An IVA and bankruptcy are legally binding therefore you should seek advice before entering into any arrangement.
If you are in debt, improving your credit rating boils down to 2 factors.
1. The debt must be dealt with. How this is achieved is dependent on personal circumstance.
2. Time. The time it takes to improve your credit rating after the debt has gone.
By dealing with the debt you not only improve your credit rating but you set yourself on a path to security and financial freedom.
Duane
A credit rating is a strange thing? It has the ability to help or hinder our lives in so many ways.
With a good credit rating it can open the flood gates to borrowing. With a bad credit rating your choices are very limited. The question is “How can an electronic record hold so much power? The answer is it’s all about risk.
Your credit score is used by any business that wishes to provide you with a service or credit. From the utility supplier looking to see if you can pay on time to a multi national bank offering you a mortgage. Your rating is the way a business assesses your risk, and your risk sets the price.
Any business offering you a service or credit is in business to make money. The business has to way up how much money they will make against the risk of you defaulting. This is why your credit score is so important. It helps them decide who is good, who is charged more and who is untouchable.
When you are in debt the debt can have a dramatic effect on your rating. The curious thing is as long as you can meet all the payments. Even if these are just minimum payments then your rating will be good. This will allow you to borrow more! A note of caution if you can’t repay your existing debt then borrowing more money is not a smart move. Seeking help is.
If you are struggling to repay your normal household bills and your debt, your rating is at a turning point. As soon as you start missing any regular payments your rating will fall. The more you miss the more it falls. By this stage it becomes so poor that the only way to improve it is by dealing with the debt.
For most people there a 3 main ways of resolving a debt problem (England & Wales only). These are Debt Management, Individual Voluntary Arrangement and Bankruptcy. Each of these solutions has different consequences so please take advice before entering any solution.
Let’s look at how each of the solutions affects your rating.
Debt Management is an informal arrangement between the Debt Management Company and the creditors. You a pay an agreed amount per month and the money is split between the creditors. As each creditor receives less than there normal monthly repayment. Your rating will continue to be affected until all of the debts have been paid in full.
Once the debts have been paid in full, your debts are classed as satisfied it will start to improve. Example: let assume debts of £25,000 with a repayment of £200 per month. Note the any debt management company charges an administration fee; let’s say £40 per month.
Without interest and charges it will take 13 years to repay the debt. However it is unlikely that the interest will be frozen and the repayment period can be much longer. In this instance your credit rating will start to improve after 13 years.
IVA (Individual Voluntary Arrangement) is a legally binding contract between yourselves and your creditors. An agreed monthly payment is paid into the IVA each month. Once the IVA is complete (usually 5 to 7 years) any surplus debt is written off.
A common misunderstanding is that your rating is treated differently in an IVA to someone in a bankruptcy. It is not. If you cannot repay all of your debts in full you are insolvent. While you are in an IVA your rating is classed as bankrupt- “Bankruptcy Status”. Your credit rating will only start improving once the IVA is complete (after 5 to 7 years). For many years after the completion of the IVA lenders will know that your previous debts were not paid in full. This will affect your ability to access credit
Bankruptcy is where you recognise that you cannot afford to repay the debts, and an application is made in the county court to be declared bankrupt. A bankruptcy lasts for 1 year but you may have to repay an agreed payment for 3 years. Once the year is over all your debts are written off.
Once you are declared bankrupt you will have a mark against your credit rating for 6 years. During this time all lenders will know that the debts were not repaid in full. However once the bankruptcy (1 year) is over your credit rating can start improving.
An IVA and bankruptcy are legally binding therefore you should seek advice before entering into any arrangement.
If you are in debt, improving your credit rating boils down to 2 factors.
1. The debt must be dealt with. How this is achieved is dependent on personal circumstance.
2. Time. The time it takes to improve your credit rating after the debt has gone.
By dealing with the debt you not only improve your credit rating but you set yourself on a path to security and financial freedom.
Duane
